Eq: Large Cap
(Washington)
As the midterm elections are starting to heat up with various primaries, it is time to revisit how the elections will impact markets. Because Republican victories in the House and Senate would simply be a continuation of the status quo, the big question seems to be what happens if Democrats win one or both. The answer is that there will likely be little impact, but if there is, it could be positive, according to Barron’s. This is because having Democrats control the house (perhaps a likely outcome) would be seen as keeping the White House’s potential overreach on trade and the economy in check.
FINSUM: Historically speaking, the midterms have resulted in strong rallies for stocks. Why wouldn’t it be the same this year? We expect either little effect or a positive one.
(New York)
Retail as a whole has had a great last twelve months after a very rough ride beforehand. Some think the run is going to continue as the US economy stays strong. That may be the case, but there is one segment of retail that looks likely to do particularly well—footwear. According to a number of analysts, footwear sales like likely to shine across the retail landscape. Everything from Nike, to Michael Kors, to Steve Madden, to Stuart Weitzman all have positive analyst outlooks in the near term.
FINSUM: Retail often does well in Q4 because of colder weather driving spending in higher margin items, so perhaps footwear could benefit.
(New York)
We don’t want to say that investors are sleepwalking into it, but in many ways it seems an apt metaphor. Whether stock investors like it or not, the US trade war with China is continuing apace. The two countries’ negotiations on the issue last week went nowhere, and the US is about to hit Beijing with $200bn more in tariffs. Their response will hurt the US economy, as many of them will be on consumer goods, which could raise prices and lower demand. Industrial stocks are likely to be hit by Beijing’s retaliations. 50% of all Chinese imports will soon be subject to new tariffs.
FINSUM: We are starting to wonder if tariffs might lead to “stagflation” in the near term. In consumer demand ebbs at the same time as prices rise for goods, it seems like a perfect recipe for stagnation and inflation.
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(New York)
If there was ever a mantra for mutual funds, it should be this: boring and cheap is beautiful. A new study by Morningstar has found that when it comes to the funds, investors are best off buying ones with very cheap fees, and not just for the obvious reasons. Morningstar dug deeper to understand the relationship between costs and performance gaps, or the spread between the return of the fund itself versus the fund’s average investor. What it found is that in low price funds, this gap was much smaller. While some of that might be accounted for by simply saying those who buy cheaper funds are smarter investors, the reality is that investors are more patient on returns when they hold cheaper funds. There is less incentive to sell, and therefore they hold the funds longer, leading to better returns.
FINSUM: This makes perfect sense to us. If you have an expensive fund that is losing money, you are going to want to dump it quickly. But if a fund is ultra-cheap, you are more inclined to give it some time.
(Los Angeles)
The saga of the Tesla buyout is finally over after three agonizing weeks. Musk announced Friday that Tesla had put its plans to go private permanently on hold. The Wall Street Journal has run a long article chronicling the internal decision-making process, but ultimately Musk and the board decided it as not an optimal decision, not least because keeping small investors on board wouldn’t have been an option and Tesla would have had to bring on competitors as investors. The stock dropped on the news.
FINSUM: If what we read is correct, Musk did not want Volkswagen to be an investor in the company. That, combined with the Saudis backing away, seems to have been a big part of staying public.
(New York)
Even if you aren’t thinking about it yet, the president is. In an interview yesterday, President Trump said that the stock market would crash if he were impeached. No one can be sure, but history suggests it would have little impact on the market. In the two previous cases in recent memory—Nixon and Clinton—the market behaved differently, falling sharply in the 12 months prior to Nixon’s impeachment, and rising before Clinton’s. JP Morgan’s best guess is that an impeachment wouldn’t be enough to derail the markets and economy itself.
FINSUM: Another interesting argument is that Trump wouldn’t ever be impeached until the market headed south, as that has happened in both of the previous instances (there was a brief but steep correction before Clinton’s impeachment). Nonetheless, we really don’t think Trump will be impeached.